Vietnam ETF Just Got Riskier

Due to recent developments, I am advising investors to steer well clear of Market Vectors Vietnam ETF (VNM - commentary - Trade Now).

Vietnam's stock market tumbled today to a three-month low as the government announced that it is devaluing the country's currency, the dong, by over 5%. The devaluation was carried out in conjunction with an interest rate hike by the government in order to battle accelerating inflation and a widening trade deficit.

The devaluation was also done to decrease the gap between the official value and the black-market value of the dong, which is still 9% lower than the official rate today.

This bodes poorly for the Vietnamese markets and VNM, which features holdings in some of the Vietnamese companies that were sold off heavily as the market lost ground.

Part of the reason for the Vietnamese markets decrease is the weak dollar, which reinforces the current preference of Vietnamese investors for gold instead of stocks. Since the dollar is not anticipated to get stronger in the near future as the Fed keeps interest rates low, the downward trend in their markets is expected to continue.

This recent development also highlights a factor that has been driving the price of gold upward and may continue to do so in the future: the buying of gold by investors in foreign countries with traditionally volatile currencies who would normally buy U.S. dollars for security. We are seeing in places such as India, and now Vietnam, this preference to invest in gold instead of depreciating dollars, driving worldwide demand and the price of the metal upward.

Therefore, until the Vietnamese markets show signs of getting over this current period of volatility and downward performance, I would recommend staying away from VNM.

At the time of publication, Dion had no positions in securities mentioned.

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Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.